How Cryptocurrency Prices Work and What Determines its prices, Explained.
How do fiat currencies differ from cryptocurrencies?
The most significant difference between fiat money and cryptocurrency values is that fiat currencies are backed by the central bank and the central government in a country and it is considered to be legal. The reason that fiat currencies have value in the today’s medium of exchange is that the central government declared it to have and people put their trust in that currency for purchasing goods and services.
All recognized countries that exist today operates in a fiat currency system, where the monetary reserves and central banks control the supply of money and, as such, indirectly and sometimes even directly control inflation. How do they directly control the inflation? Basically, The amount of money is printed or the amount of money that is given a loan by the central banks.
For example, Germany after world war one, where they tried to pay their debt that was imposed on them after the treaty of Versailles by printing money, this caused for the value of their fiat currency to drop since there was more money in the market. In November 1922 the cost of bread was 163 marks, exactly after a year, in November 1923, the price of bread became 200,000,000,000 Marks, Crazy huh. And there are many more examples of how the central bank can control the value of a currency but more on that another day.
On the other hand, cryptocurrencies are not controlled by an authority or by the central government, and it is not accepted as legal tender in most regions. Also, almost all Cryptocurrencies, if not all, have a fixed supply because of that, the devaluation of cryptocurrencies is mostly nonexistent through inflation.
Other than that, both cryptocurrency and fiat values are supported by almost the same characteristics. Both methods can be used to purchase goods and services, and both ways have a relative store of value.